J.C. Penney and Macy's Head Back to the Courtroom

After a month of failed mediation, Macy's (NYSE: M) , Martha Stewart Living Omnimedia (NYSE: MSO) , and J.C. Penney (NYSE: JCP) returned to the courtroom to hash out their differences. Those differences revolve around the allegation that Stewart's company broke its exclusivity contract with Macy's when it agreed to sell in a new J.C. Penney's shop within a shop. Macy's has requested two injunctions, and the judge overseeing the case granted one. The case had been on hiatus while the companies tried to make things work in the mandated mediation -- but now it's back on.

The issue at issueIf you had to boil the conflict down to one word, the word would be "store." Macy's signed a deal with Stewart that meant the retailer had exclusive rights to sell some Martha Stewart Living branded merchandise. As part of the contract, Stewart agreed not to sell those items in any other store, unless it was a Martha Stewart-run location.

Enter J.C. Penney, which signed up Stewart as part of the company's store-within-a-store program. Macy's saw this as a violation of its terms, while Stewart and J.C. Penney believed that the store should count as a stand-alone location, and thus fall into the Stewart-run exemption.

To muddle matters more, Judge Jeffrey Oing ruled for Macy's in one of the injunctions, and for J.C. Penney in the other. In effect, the judge said that Macy's was right to try to stop Stewart from selling certain items, but J.C. Penney was also right to think that it could sell those items. Wow.

Outcomes to watch out forOing has said that any fines that come from the case will be small change compared to the loss associated with the injunction. For J.C. Penney, it could be a heart-stopper. The company already has stock of Martha Stewart products in its inventory, waiting to hit the shelves. Right now, the whole thing represents lost revenue, filling up shelves in back rooms.

Macy's, on the other hand, doesn't have a huge stake in the game. If it wins, then it gets to keep selling Stewart's merchandise. If it doesn't, then it will face a fine and probably stop carrying the merchandise. So far, neither of those outcomes has worried investors, with Macy's stock up 13% since the beginning of the year. On the other hand, Martha Stewart is down 4% and J.C. Penney -- which has had more problems than just this case -- is down 20%.

The bottom lineThe end of mediation is bad news for both Martha Stewart and J.C. Penney investors. An out-of-court resolution would likely have been milder, and -- more important -- quicker. Right now, time is against J.C. Penney, which is just sitting on inventory. Macy's has all the time in the world, and no impetus to try to move things along faster. The longer this drags on, the worse it's going to get.

J.C. Penney has been a train wreck whose comeback always seems just around the next earnings corner, but investors are beginning to doubt that it will actually happen. If you're wondering whether J.C. Penney is a buy today, you're invited to claim a copy of The Motley Fool's must-read report on the company. Learn everything you need to know about JCP's turnaround -- or lack thereof. Simply click here now for instant access.

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